Olympic investing: gold and silver for uncertain times

There’s a reason they give gold and silver Olympic medals. The precious metals have been highly prized since the dawn of civilisation – and today, they are still seen as a safe haven for investors.

So if you are looking to invest in gold and silver, what’s the best way to go about it – and when is the best time to strike?

First, it’s important to understand how and why gold and silver prices move on the international markets.

Because they are seen as a safe haven due to their intrinsic value, gold and silver prices soar in times of war or severe terrorist threat.

Wars

In 1990, in the run-up to the Gulf War, the gold price rocketed. When Saddam Hussein invaded Kuwait on August 2 gold shot up from $380 per troy ounce to more than $412 on August 23.

Soldiers from the 1st Battalion of the Black Watch in Iraq in 2004 Photo: PA

The price then fluctuated, falling back before peaking again at $387 in early January 1991 as the deadline for Saddam to withdraw his troops loomed, before dropping back once more as the overwhelming US-led invasion got under way.

Similar patterns can be seen in the run-up to and during the Iraq War, and the crisis concerning the possibility of military action over Iran’s nuclear programme in November 2007, when gold reached a 27-year high of $806.

The Al Qaeda attack on the World Trade Centre on September 11, 2001 – 9/11 – saw gold prices spike from $215.50 to $287 an ounce in London trading (New York markets were shut down).

Great Financial Crisis

So does this mean gold always rises in times of crisis? Not necessarily. During economic crises they often behave differently.

During the financial crisis of 2007-09, you might have expected gold to soar given the global banking system was in meltdown.

And indeed, it did – initially. In fact gold had been rising for some time as the dollar weakened from 2004, and spiked at the start of the financial crisis, rising from $653 on August 13, 2007 to $978.5 on March 3, 2008.

However, then something apparently strange occurred (see chart) – in the midst of the sub-prime crisis, gold began to fall, and the dollar started to rise from a low of ¢94.99 on July 14, 2008 (measured against a basket of other currencies – the Trade Weighted US Dollar Index).

Reserve currency

The reason is that the dollar is also seen as a safe haven, based on America’s vast underlying economic strength, and has become the world’s primary ‘reserve currency’.

An economic crisis, almost anywhere in the world, will see companies selling assets or local currencies and piling into dollars, rather like someone hoarding their cash under the mattress because they don’t trust the banks.

Customer queue to withdraw their money from Northern Rock in 2007 Photo: PA

As with anything that is in huge demand, the price of the dollar then rises, and the price of that other safe haven, gold, will fall – in fact, they often move inversely.

Quantitative easing

In 2009, the US government introducing quantitative easing (QE) – effectively printing money by the back door, flooding the economy with cash. The dollar fell like a stone from a high of ¢114.38 on March 2 to ¢100.22 on November 30.

Meanwhile gold rose from $742.0 on November 3, 2008 as QE was announced to $1,203.25 on November 30 – a dramatic 38% rise in just under a month.

As further rounds of QE followed, weakening the dollar further, the price of gold continued to rise to an all-time record high of more than $1,900 in August 2011.

So what can we learn from this dramatic episode?

That gold prices will often mirror the dollar, rising as it falls, and falling as it rises – though it’s far from being a precise mirror image, more a distorted reflection – and great care needs to be taken when investing.

And that war, and rumours of war, will almost always push up gold prices.

What about silver?

But what of silver, that other precious metal that was once used as a universal currency by most of the world?

There is actually more gold ‘above ground’ than silver, if you include jewellery and gold used in manufacturing (which is almost always recovered), although identifiable stocks are slightly less.

Historically, an estimated 1.3m tonnes of silver has been mined. However, silver is in high demand by industry due to its unique properties, and that has led to a huge loss of the metal, leaving gold overall more plentiful today.

According to the World Gold Council, 186,700 tonnes of gold have been mined throughout history, most of which still exists, and each year global mining adds approximately 2,500-3,000 tonnes.

Silver’s running out

In comparison, the total weight of silver above ground in identifiable stocks stands at 78,067 tonnes, not including jewellery and manufacturing, according to the 2017 World Silver Survey, with mining adding roughly 27,500 tonnes each year.

However, global reserves of silver will start diminishing rapidly from 2032 onwards, and new supplies could run out by 2040 unless recycling improves, according to the scientific journal Resources, Conservation and Recycling.

The report says there will be “a slow increase in the silver price in the future, however supply will have an increasing fraction from recycling; all silver will have to come from recycling in 2140”.

So long-term investment in silver could be a wise move. But investors should also be cautious, because silver prices are highly volatile.

The silver price generally tracks the gold price, but silver price movements tend to be much more frequent and extreme in scale, particularly on the down-side.

Buying and selling

There are various ways to invest in gold and silver. You can buy small bullion bars from the Royal Mint – just over £31,000 will buy you a 1kg hallmarked gold bar. Or you could buy a 1kg bar of sterling silver for £443. However, there are obvious security risks to storing bars like this at home.

Gold billions bars available from the Royal Mint Photo: Royal Mint

Perhaps a safer way to buy bullion is through companies such as BullionVault, which is part-owned by the World Gold Council. As the name implies, the company keeps your bullion stored safely in its vaults, so you don’t have sleepless nights about burglaries.

BullionVault now has more than 65,000 active customers, from over 175 countries, holding approximately $2bn in stored bullion.

In fact, with more than 37 tonnes of gold and 500 tonnes of silver bullion, BullionVault's customers are already holding significantly larger reserves than most of the world's central banks.

Silver dealing

Another way to deal in precious metals is to buy and sell gold and silver futures, either directly or by proxy via financial trading websites.

However you should be aware the leverage is high, meaning you could make huge losses as well as big gains, and any connection to actual gold in a vault is somewhat tenuous.

You would also find yourself up against big institutional traders, whose ‘buys’ and ‘sells’ can artificially distort the market.

A safer way to invest is via an exchange traded fund (ETF), either by buying into the fund itself, or again, by proxy through a financial trading website.

ETFs are companies that buy assets – in this case gold or silver – as a long-term investment, and you can then buy shares in the ETF itself, which is listed on the stock exchange.

Prices of the shares can obviously rise and fall like any other stock, but you can buy and sell at any time.

As with any investment, you want to aim to sell before the price peaks – in other words, when it’s on the way up, rather than on the way down, as price falls are often more sudden and dramatic in scale than price rises.

Since both gold and silver are dependent on sentiment – dangers threatening the world, both economically and physically – this is not necessarily an easy call, but as always, err on the side of caution.

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